Redistributing Optimally: Of Tax Rules, Legal Rules, and Insurance

From the beginning of the law and economics movement, normative legal economists have focused almost exclusively on evaluating the efficiency of alternative legal rules. The distributional consequences of legal rules, therefore, have largely been ignored. It is tempting to conclude that legal economists are hostile or indifferent to concerns of distributional fairness. In fact, however, the discipline of economics has a great deal to say about distributional policy. The normative branch of economics, known as welfare economics, has always been deeply concerned with distributional issues. It is not that welfare economists purport to know a priori the right or optimal distribution of resources. To the contrary, the standard approach among public finance economists has been to remain neutral on the types of inequality in society that ought to be the target of redistributive policy and how much, if any, redistribution is appropriate. If those same economists, however, were provided with a theory of distributive justice, they then could build that theory into their framework for evaluating public policy. Indeed, economists have created mathematical models of tax regimes to accommodate any number of theories of distributive justice: from the Rawlsian maximin criterion, which manifests a special concern for the well-being of the least advantaged members in society, to the various versions of utilitarianism, which, depending on the assumptions, can justify complete equalization of income or redistribution from the worse off to the better off. Again, while economists are able to build these theories into their models, they typically do not endorse any particular theory of distributive justice